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Property Purchase Via Land Contract

Posted on:
17 July 2017

Most people apply for a mortgage when they want to buy a house. The mortgage lender loans them the money, which they then use to purchase property, and they repay the loan in periodic installments. This is the most common way of buying property, but there are other, more unconventional methods that work just as great. A good example is a land contract, which is explained below:

What It Is

A land contract is roughly like a mortgage, with the main difference being that you make the regular payments to the property owner, and not a lender (such as a bank). Just like a mortgage arrangement, you sit down with the property owner and negotiate the interest rates, monthly installments, and the term (duration of the payments).

The Advantages

A premier advantage of property purchase via land contract is that it allows you to buy property even if, for one reason or another, you don't qualify for a conventional mortgage. For example, a willing seller may enter into a land contract with you even if your credit rating or income is too low for you to qualify for a regular mortgage. This is possible because conventional mortgage lenders tend to have more stringent requirements than property owners.

A second advantage is that entering into a land contract frees up your debt obligations and allows you to access other lines of credit. As you know, your debt-to-credit ratio is one of the factors lenders consider before issuing loans. Taking out a mortgage negatively interferes with this balance (assuming other factors remain constant) while a land contract isn't generally reported to the credit bureaus.

The Disadvantages

Unfortunately, you can easily lose your property (purchased via land contract) if you fail to make the agreed payments. What usually happens in such cases is that the seller files a land contract forfeiture, which basically alleges that you have failed to fulfill your side of the bargain, so the seller has the right to reclaim it. If that happens to you, you will lose both the house and the money you had already paid for it.

Another disadvantage is that a land contract doesn't help you build your credit rating. Therefore, if you opted for a land contract because your credit history was too poor to qualify you for a loan, the land contract will not help you to remedy the situation because it isn't a loan in the strict meaning of the term. This is different from a mortgage, which can shore up your credit rating and help you qualify for future loans.